Revenue

Obama Spoils for an Election Year Tax Fight

In theory, Republicans would happily get behind President Barack Obama’s proposal to reduce the U.S. corporate tax rate from 35 percent to 28 percent and eliminate some loopholes. Most members of Congress profess to find both high taxes and loopholes odious and agree with Obama when he says the current system is “outdated, unfair, and inefficient.” Testifying on Capitol Hill earlier this month, Treasury Secretary Timothy Geithner suggested optimistically that there was “more room for common ground” on tax reform.

That’s in theory. In practice, the GOP regarded the President’s announcement less like an outstretched hand than an election year trap. It wasn’t an unreasonable assumption. If a campaign-year proposal to cut taxes would have been encroaching on Republican turf, a proposal to cut corporate taxes rates was an outright raid on their clubhouse. Obama was plainly challenging them to say no.

They did, within hours. “Unfortunately, this so-called framework is murky, ill-defined, and contradictory to the goal of reducing complexity and making our tax code more efficient,” said Senator Orrin Hatch of Utah in a statement. Republicans will attempt to reject Obama’s tax plan without looking like they’re selling out corporations. Instead of focusing on the proposed lower tax rate (which they’ll probably argue should be lower still), they’ll call attention to the special tax breaks the President wants to protect.

At 35 percent, American corporations currently enjoy the second-highest marginal tax rates in the world, behind Japan. These are the rates, however, and not the actual amount of money they bring to the Treasury. In 2010 the U.S. took in about 2.7 percent of its gross domestic product in corporate taxes. This is the same rate as the bicycle-loving socialists of Belgium and Denmark. That is: a high rate but a middling take. One could argue—as Republicans often do—that high taxes smother growth and reduce the take. But a lot also dribbles out through what you can call either an “expenditure” or a “loophole.” Things like the way interest is deducted, or how long businesses have to depreciate buildings and machinery. The boring stuff adds up.

The President’s proposal seems designed to satisfy both of these arguments. It’s not a new concept. In December 2010, the National Commission on Fiscal Responsibility and Reform (you know it as the Simpson-Bowles commission) proposed closing corporate tax loopholes and establishing a single corporate rate somewhere between 23 percent and 29 percent. A lower overall rate would improve American competitiveness, the commission concluded in its report, and getting rid of subsidies would “create an even playing field for all businesses instead of artificially picking winners and losers.”

Obama’s version lowers the rate but instead of proposing to end all subsidies in the corporate tax code, he picks a few winners himself. The new plan keeps tax breaks for, among other things, corporate research, domestic manufacturing, and renewable energy.

This is what Hatch means when he says Obama’s plan fails to reduce complexity. By holding on to only his own darlings, the President appears to be trading some loopholes for others. The administration is vague on exactly how it’ll increase overall revenue while getting the rate down to a pleasing 28 percent. “We’ll have a very important debate about which of those types of incentives we should preserve, which we can’t afford any longer,” Geithner said in his congressional testimony. That would be nice, but isn’t likely, as Obama surely knows. The President waited until the heat of an election to unveil a proposal aimed at coopting his opponents. He isn’t looking for a debate. He’s stealing a talking point.